EXTERNAL ENVIRONMENT
Darrel Jake Macalawa, MBA
Case Review
ARE THERE CRACKS IN
THE GOLDEN ARCHES?
ARE THERE CRACKS IN THE
GOLDEN ARCHES?
• What are the challenges encountered by McDonald’s in
recent years?
ARE THERE CRACKS IN THE
GOLDEN ARCHES?
• How did McDonald’s respond to these challenges?
ARE THERE CRACKS IN THE
GOLDEN ARCHES?
• In the Philippines, what can you suggest to McDonald’s
to ensure they keep up with the changing customer
preference?
ARE THERE CRACKS IN THE
GOLDEN ARCHES?
• Who are McDonald’s direct competitors in the local
market? How do you think they can compete more?
The General,
Industry and
Competitor
Environments
General Environment
• The general environment is composed of dimensions in the broader
society that influence an industry and the firms within it.
The General
Environment
Industry Environment
• The industry environment is the set of factors that directly influences a firm and
its competitive actions and responses: the threat of new entrants, the power of
suppliers, the power of buyers, the threat of product substitutes, and the
intensity of rivalry among competing firms.
• An industry is a group of firms producing products that are close substitutes. In
the course of competition, these firms influence one another.
Industry Environment
• The challenge for a firm is to locate a position within an industry where it can
favorably influence the five factors or where it can successfully defend itself
against their influence. The greater a firm’s capacity to favorably influence its
industry environment, the greater the likelihood it will earn above-average returns.
Industry
Environment:
The Five Forces of
Competition Model
Industry Environment
THREAT OF NEW ENTRANTS
• Identifying new entrants is important because they can threaten the market share
of existing competitors. One reason new entrants pose such a threat is that they
bring additional production capacity.
• Unless the demand for a good or service is increasing, additional capacity holds
consumers’ costs down, resulting in less revenue and lower returns for competing
firms.
Industry Environment
THREAT OF NEW ENTRANTS
Barriers to Entry
• Economies of scale • Access to distribution channels
• Product differentiation • Cost disadvantages independent of
• Capital requirements scale
• Switching costs • Government policy
Industry Environment
THREAT OF NEW ENTRANTS
• Expected retaliation. Companies seeking to enter an industry also anticipate the
reactions of firms in the industry. An expectation of swift and vigorous competitive
responses reduces the likelihood of entry. Vigorous retaliation can be expected
when the existing firm has a major stake in the industry (e.g., it has fixed assets
with few, if any, alternative uses), when it has substantial resources, and when
industry growth is slow or constrained.
Industry Environment
BARGAINING POWER OF SUPPLIERS
A supplier group is powerful when:
• It is dominated by a few large companies and is more concentrated than the industry to
which it sells.
• Satisfactory substitute products are not available to industry firms.
• Industry firms are not a significant customer for the supplier group.
• Suppliers’ goods are critical to buyers’ marketplace success.
• The effectiveness of suppliers’ products has created high switching costs for industry firms.
• It poses a credible threat to integrate forward into the buyers’ industry. Credibility is
enhanced when suppliers have substantial resources and provide a highly differentiated
product.
Industry Environment
BARGAINING POWER OF BUYERS
Customers (buyer groups) are powerful when:
• They purchase a large portion of an industry’s total output.
• The sales of the product being purchased account for a significant portion of the seller’s
annual revenues.
• They could switch to another product at little, if any, cost.
• The industry’s products are undifferentiated or standardized, and the buyers pose a credible
threat if they were to integrate backward into the sellers’ industry.
Industry Environment
THREAT OF SUBSTITUTE PRODUCTS
• Substitute products are goods or services from outside a given industry
that perform similar or the same functions as a product that the industry
produces.
• For example, newspaper firms have experienced significant circulation
declines over the past 15 years. The declines are a result of the ready
availability of substitute outlets for news including Internet sources, cable
television news channels, along with e-mail and cell phone alerts.
Industry Environment
INTENSITY OF RIVALRY AMONG COMPETITORS
Factors Influencing High Intensity Competition
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs or high storage costs
• Lack of differentiation or low switching costs
• High strategic stakes
• High exit barriers
Competitor Analysis
• How companies gather and interpret information about their competitors is
called competitor analysis. Understanding the firm’s competitor
environment complements the insights provided by studying the general
and industry environments.
Competitor Analysis
In a competitor analysis, the firm seeks to understand the following:
• What drives the competitor, as shown by its future objectives.
• What the competitor is doing and can do, as revealed by its current
strategy.
• What the competitor believes about the industry, as shown by its
assumptions.
• What the competitor’s capabilities are, as shown by its strengths and
weaknesses.
Competitor Analysis
Competitor intelligence is the set of data and information the firm gathers
to better understand and anticipate competitors’ objectives, strategies,
assumptions, and capabilities.
Competitor
Analysis
Components
External Environment Analysis
• An opportunity is a condition in the general environment that, if exploited
effectively, helps a company reach strategic competitiveness. Most
companies—and certainly large ones—continuously encounter multiple
opportunities as well as threats.
• A threat is a condition in the general environment that may hinder a
company’s efforts to achieve strategic competitiveness.
External Environment Analysis
Ethical Considerations
• Firms must follow relevant laws and regulations as well as carefully
articulated ethical guidelines when gathering competitor intelligence.
Industry associations often develop lists of these practices that firms can
adopt. Practices considered both legal and ethical include:
1. Obtaining publicly available information (e.g., court records, competitors’
help-wanted advertisements, annual reports, financial reports of publicly
held corporations, and Uniform Commercial Code filings)
2. Attending trade fairs and shows to obtain competitors’ brochures, view
their exhibits, and listen to discussions about their products.
Ethical Considerations
Practices that are considered unethical:
• Blackmail
• Trespassing
• Eavesdropping
• Stealing drawings, samples, or documents
End of Presentation